New IR35 tool lets workers test their status

The IR35 digital tool -- a long-awaited widget to
help assess the IR35 status of the public sector’s incorporated freelancers --
has finally been launched by HM Revenue & Customs.

In a
much-anticipated update to its website, HMRC said “people” can now check if the
Intermediaries legislation applies to an engagement,” in the department’s view.

The word
“people” is important, as although the tool was initially meant just for
end-clients, the first question asks the user to select whether they wish to
use the tool as a worker, end-client or agency.

What
follows is a pre-programmed series of questions which fluctuates what's asked
based on the user's responses.

However,
the questions stop once the tool believes it has collected enough information
(based on the user's responses) to reach a decision on IR35 status.

Or, as
the tool specifies: “This engagement should be classed as employed for tax
purposes,” so the “intermediaries legislation will apply”.

But the
tool is not always decisive. Insert answers that point to IR35 in reply to some
questions, and those that point to being in business of one’s own account in
reply to others, and the tool won’t guess either way.

“Unable
to determine the tax status of this engagement,” it concludes with such inputs,
before directing the user to HMRC for further help but assuring that the
results (all are printable) will not be stored on HMRC servers.

Workers
are likely to welcome this non-retention promise because many have historically
been concerned that HMRC’s IR35 services, like Contract Review, can be
used against them.

‘Reliant on substitution’

But freelancers
who don’t have a substitute will feel glum more than reassured if they use the
IR35 tool ahead of the April
6th rules it has primarily been built for.

“From a
first examination, this test is largely reliant on substitution,”
said status advisory Qdos.

“If, as a
contractor, you don’t have the right to send a replacement, there is little
prospect of the tool deeming you outside IR35, even
if you have control
over how the work is done.

“This
goes against case law established in
Ready
Mixed Concrete, where an absence of control by the engager was a
pivotal and determining factor.”

‘Won’t be interviewed by the
end-client’

The
advisory’s concerns, expressed in relation to the tool’s question five, extend
to the notes provided under the substitution question which state that, to be
acceptable, the substitute must not be interviewed by the end-client.

“While
‘interview’ is a term which could suggest an employment relationship, the
engager would be within their rights to meet a proposed substitute prior to
them being used; this would not mean the right was overly fettered,” Qdos said.

“It also
infers substitution is only valid if the original worker is ‘unwilling but not
unable to do the work’. This is in contradiction to the ruling in Express &
Echo Publications Ltd”.

Under the
ruling, where it occurs that the contractor is unable“
or”unwilling
to perform the services personally, they shall arrange at their own expense
(entirely) for another suitable person to carry out the service.

‘Not unable’

However,
the new IR35 tool only permits a positive answer to the substitute question
(which would suggest the more desirable, outside IR35 result) if the person is
only unwilling, “not unable” to do the work.

“A worker
could fall ill -- and therefore be unable to work -- and send a replacement;
this would still constitute a genuine substitution,” said Qdos’ chief executive
Seb Maley, sounding disappointed. “We will be testing and conducting further
analysis on the tool”.

Speaking
just before the tool’s release, another adviser to freelance contractors said
their wish for this week's Budget
2017 was for clarity on penalties for IR35 non-compliance. Accountant
Carolyn Walsh, formerly of HMRC, will therefore be pleased.

Under the
tool it states: “There can be significant consequences if you, your
intermediary, or client ignore IR35 legislation.

‘Severe’

“Interest
and penalties can be charged on any extra tax and National Insurance
contributions that are owed. Penalties can be more severe if it can be proved
that IR35 rules or legislation have been deliberately ignored.”

Then
brandish the ‘carrot’ -- instead of just the ‘stick,’ the Revenue says that
making a voluntary disclosure about IR35 status to its officials “may” reduce
any penalties that are due.

Elsewhere
in notes underneath the tool, the tax authority provides
guidance on ‘working out the client and worker relationship,’ ‘using an agency
or Managed Service Company to provide a service’, and being a Personal Service Company
(a limited company) overseas.

The IR35
tool and these notes covering potential users and circumstances follow a technical note that HMRC published within its existing IR35
guidance set.

Both these
types of business were last night “up in arms” about the guidance implying that
they are caught, a status specialist says, as are -- presumably -- Managed
Service Companies, because the MSC legislation will be superseded by the new rules from April 6th.